First, The Bad News…

This is my first article for Oilprice.com, so I tried to find something really upbeat to write about. I wanted to be positive and to re-assure those of you here that oil, and energy in general, is in an almost perpetual boom and that everything in the garden is rosy. I tried, I really did, but my role here is to help you make money from the energy markets, not to make you feel all warm and fuzzy, and reality kept intruding.

There are, for me, a couple of bright spots; Cobalt International (CIE), for example, which I like for the admittedly unscientific reasons detailed in this Nasdaq.com article. The thing is, however, that as I'm sure most of you are aware, the fate of most things in the energy sector is tied to the price of crude oil, particularly in the short term, and even a cursory reading of that chart tells me that further gains are unlikely.

Actually when I say "even" a cursory reading of the chart, that is not strictly true. Given that I made a living for twenty years in foreign exchange dealing rooms around the world, many people are surprised to learn that my chart analysis rarely goes beyond the basic. Those people, you see, assume that forex and all commodity markets are immensely technical. Their problem is that they haven't met many real live, paid traders. Traders in the pit, on the floor or at the trading desk all understand one thing; the more obvious the chart pattern, the more useful it is. Prices don't move off of chart points because of some magic; they simply move because certain levels bring in buyers and sellers, and the more obvious the level, the more of those there are.

The fact, then, that NYMEX WTI crude prices are trading up around two year highs would make me extremely nervous if I were long, and seems to me like a cue for a relatively low risk short. It's not that they can't go higher, of course they can. All you would have to do is extend this chart back for another couple of months you would see a high around 110, but any upside move is likely to be limited, while any drop has room to go. This, you see, is the key to trading, whether it be for the seconds or minutes that I and my erstwhile colleagues would hold positions, or for the years that investors consider. It always pays to look for the path of least resistance, and right now in oil that would seem to be downwards.

The upside to crude prices is also naturally capped by more general, big picture factors. We are approaching the point where the crude price will result in a significant increase in consumer gasoline prices at the pump here in the US. I am originally from England, so can fully understand those of you outside the US who are mystified by the near panic that will ensue should the American driver be asked to pay $4/gallon for fuel, but, as somebody who now lives in the US, I can assure you that said panic will come. Higher gas prices do present real problems in a country designed to be driven around, but the reaction will still be a little over the top. Talking heads will predict doom on TV and both political parties will accuse the other of being responsible for threatening the American way of life etc., etc. Before long the specter of 1973 will be raised and talk of a slowdown will begin, pushing crude prices lower. If this feels like déjà vu all over again, it's because we really have seen it before.

Even the commodity and currency markets, with their natural short time horizons, operate with an eye to the very long term and, there too, there are factors that could limit or slow any further rise in crude prices. So called "alternative" energy is becoming increasingly mainstream. When Angela Merkel, the head of a Right leaning CDU/CSU coalition is re-elected in Germany on a platform that includes eliminating fossil fuels from German energy policy, we can be sure that attitudes are changing. Combine that with increased supply of oil due to technological advances in shale and deep-water production and the long term outlook for oil prices will also put the brakes on any further rise.

As I said, I wanted to be positive; I am not, by nature a merchant of doom and gloom. What I am, however, is a realist when it comes to markets. Being paid to trade makes you that way. I could have probably made a coherent argument that momentum would rule and we would soar on up to, and maybe through, the $110 level. I could have, but that would make me just like the "analysts" on gold sites who were still bullish at $1700.

The thing is, this is an opinion, and we all know what those are like. You are perfectly entitled to the opposite one, and if so I'll see you on the opposite side of the trade, but if you are heavily exposed to the oil industry, you may at least want to consider hedging at these levels. Whichever way you look at it, it seems, the price of oil has an extremely limited upside from here and a correction at least is far more likely.